The Problem with Staging Distributions or Withdrawal Rights


Early in my career I remember a couple talking about how brilliant their attorney was for suggesting that they structure their estate plan to provide for a series of distributions over time as opposed to providing access all at once to their children.  Even back then, I knew that this was probably the most common approach estate planners took (and still take) when designing trusts for minor or young adult beneficiaries.  In fact, I suspect that over 2/3 of such trusts have some variation of: 1/3 at age 25, 1/2 the balance at age 30 and the rest at age 35.  Heck, I wouldn’t be surprised if that was in your estate plan!

So why the popularity?  And is it deserved?  As to the former question, I think the answer is fairly simple – and it is what the awestruck couple picked up on – there is a potential for learning from one’s mistakes.  You buy that Ferrari at age 25 or make some other foolish purchase or decision, and you have five years to realize your mistakes so that you’re in a better mindset by the time the next distribution or withdrawal right comes along five years later.  And certainly there is the opportunity to learn from poor management of the first percentage in order to be more equipped to do better with the second.   Some will take advantage of that opportunity, and others won’t.

And, in truth, the barrier to “blowing it all in one shot” aspect of a staged structure probably makes it more appealing than an all-at-once approach in most cases.  But upon reflection, doesn’t it seem odd to rely on the vices of a hedonistic lifestyle as an effective developer of financial maturity and wisdom?  Particularly when the structure is designed to cover over the missteps in the previous five years.  I don’t think we try to impart good values and behavior using this approach in any other context – at least I’m struggling to come up with a parallel that doesn’t sound insane and that’s actually used in real life.

So the risk is that there could be a snowball effect – the costs of poor decision-making are wiped away with another distribution allowing for, even encouraging, an additional period of poor decision-making.  So why not delay the first stage until the beneficiary is more financially mature?  There is some appeal to that, but if the delay is pushed out to when the beneficiary is financially mature (or at least as mature as they are going to get), then what’s the point of the staging?

Of course each situation will work out as it will and is dependent on the particular beneficiary involved, the amount of money involved, etc.  And as stated above, the potential for learning has some value.  But when designing a structure for trusts that will hold significant wealth – if your primary goals are to have beneficiaries of high character and competence – you need to consider both the positives and the negatives of a proposed structure.  And when it comes to staging, my fear is that most advisors stop at the upsides and never consider the downsides.

What do you think?


About Author

Mark initiated this blog due to his passion in assisting and equipping families to manage their wealth and their families well.

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